Dividend cover at lowest level since 2009

Private limited company dividend cover has fallen to its lowest level since 2009’s recession, according to research by The Share Centre.

Dividend cover is defined as profit after tax divided by dividends paid. A lower ratio means that a company is likely to have to cut dividends if its profits fall.

Based on the top 350 listed companies in the year end of December 2015 to March 2016, dividend cover has dropped by 38% in the past year – falling from 1.63x to 0.98x.

This has resulted in some companies paying out more in dividends than they made in profit.

Companies in the oil and gas and financial industries have also been hit hard by recent activity in the global market.

Profits have been affected by the fall of commodity prices, while negative interest rates have impacted bank margins, resulting in net profits across all listed companies to fall by 54% - from £165.7 billion in 2015.

In contrast, dividend payments rose to £78.4 billion, up from £71.2 billion over the same period. This is the first time since the recession that dividends have exceeded net profits.

Helal Miah, research investment analyst from The Share Centre, said:

“We have already seen companies announce a slew of dividends cuts, many of which are still to filter through. This will protect companies from unaffordable outflows of cash. In an ideal world, investors would see dividend cover recover owing to a bounce-back in profits, rather than from cuts in the dividend.”